WORKING PAPER ON THE REFORM OF TAX LAWS IN NIGERIA: THE FEDERAL INLAND REVENUE SERVICE (ESTABLISHMENT) ACT 2007

TABLE OF CONTENTS

PART PAGE

PART A: Introduction …………………………………… 3-12

PART B: Overview of the Federal Inland Revenue Service (Establishment) Act

2007 ……………...... 13-27

PART C: Defects in the Act and Proposals for Reform ...28-54

PART D: Conclusion …………………………………… 55-57

PART E: Draft Federal Inland Revenue Service (Establishment)

Bill, 2017 ……………………...... 58-68

INTRODUCTION

  1. Nigeria’s economy has in the last four decades depended on oil as its mainrevenue earner. In the past few years however, the price of oil in the International market has become unstable. There are alsoscientific and technological advancements targeted at providing alternatives to oil. This implies that over dependence on oil as a source of revenue by any nation is no longer economically viable. It is on this premise that Nigerian government must explore and strengthen other sources of revenue outside oil.
  2. One of the sources of revenue generation that can reduce Nigeria’s over-dependence on oil revenue is taxation. Tax has been defined as a compulsory levy on citizens (persons), property, income, commodities (goods) and transactions etc[1]which aids in revenue generation for national development. Many developed countries in the world depend on tax as their main or only revenue earner and source for economic and social development.
  3. In the case of Nigeria, outside the revenue from oil, tax has been and is still a major contributor to national revenue. Available statistics show that over N4Trillion was collected for the Federation by the Federal Inland Revenue Service (FIRS) in2017.[2]
  4. The Nigerian tax regime can rightly be described as burdensome and ineffective in some respects. This situation is further exacerbated by the largely bureaucratic manual tax administration system rather than a technology driven risk base approach. The issue ranges from tax legislation to administration and policy matters.[3] It is in consideration of these challenges that the Nigerian Law Reform Commission in line with the economic reforms of the Federal Government decided to carry out a reform exercise of the various tax laws in Nigeria. The reform shall be in phases of which the first phase of this reform is the reform of the Federal Inland Revenue Service (Establishment) Act 2007.
  5. Despite the successes recorded by FIRS in tax collection, the Service has maintained that Nigeria has the potential to generate more tax revenue if there is a better tax administration system in the country.[4]This implies that the tax administrative system is faulty and needs to be corrected and strengthened for effective performance
  6. It is therefore imperative to reform the extant tax laws and the tax administration system in order to reposition the country to attain its full potential in collection of taxes to boost the country’s revenue base and build a solid economic structure.

History of Taxation in Nigeria

  1. The history of modern taxation in Nigeria started with the Stamp Duties Proclamation Ordinance of 1903.[5]
  2. Sincethisperiod, there has been a steady reform aimed at modernizing, expanding, and improving the process, procedure for collection and sanctions for failure to comply.
  3. During the colonial era, the Inland Revenue Department was established for the Anglo-phone West Africa whose scope of coverage included Nigeria, Ghana, Sierra Leone and the Gambia.
  4. In 1943, the Nigerian Inland Revenue Department was carved out ofAnglophone West Africa and became an autonomous body under the supervision of the Commissioner of Income Tax.[6]
  5. After independence in 1960, the Income Tax Act No.22 (1961) was enacted which established the Federal Board of Inland Revenue, (FBIR).[7] This Act also created a Body of Appeal Commissioners (BAC) to resolve tax-related disputes.
  6. In 1991, the Federal Government set up a study group whose terms of reference included a review of the country’s tax administration. The report of the group led to the promulgation of the Finance (Miscellaneous Taxation Provisions) Decree No.3 of 1993.
  7. This Decree No.3 of 1993 established the Federal Inland Revenue Service (FIRS) as the operational arms of the FBIR which reviewed the functions of the Joint Tax Board (JTB).
  8. In spite of the reforms introduced by Decree No.3 of 1993, tax administration remained a function of the Civil Service which was still not good enough and therefore not very effective.

The Federal Inland Revenue Service

  1. In 2007, the tax administration regime dramatically changed when financial and administrative autonomy was granted to the Federal Inland Revenue Service with the enactment of the Federal Inland Revenue Service (Establishment) Act, (FIRS) 2007.[8]
  2. The major innovation introduced by this Act, was that the corporate personality was vested in the FIRS instead of the FBIR.
  3. This Act also gave birth to a central tax administration Agency,[9] while the FIRS effectively took over the control and administration of taxes which included laws specified in the seven legislation listed in the First schedule to the Act.
  4. The administrative and financial autonomy granted to the FIRS completely removed the Service from the control of the Federal Civil Service Commission with regards staff recruitment, promotion, discipline and welfare.[10]The Service is funded by the cost of collection mechanism whereby a certain percentage of all non-oil revenue collected by the FIRS is appropriated by the National Assembly for the operation of the Service[11].

The Tax Appeal Tribunal

  1. The Federal Inland Revenue Service (Establishment) Act (FIRS), 2007 established a strong dispute resolution body, known as the Tax Appeal Tribunal (TAT).[12] The TAT formally took off pursuant to Tax Appeal Tribunal Establishment Order 2009 issued by the Minister of Finance as Published in the Federal Government Official Gazette N0.296, Vol. 96 of 2nd December, 2009.[13] By virtue of Section 59 (2) of the FIRS Act, TAT has Jurisdiction over disputes arising from the under listed laws:

a.Companies Income Tax Act (CITA);

b.Petroleum Profit Tax Act (PPTA);

c.Personal Income Tax Act (PITA);

d.Capital Gains Tax Act;

e.Stamp Duties Act; and

f.Value Added Tax Act.

  1. The Tribunal has additional jurisdiction over the items listed in Paragraphs 6 to 11 of the First Schedule to the FIRS Act and these are:

(a)Stamp Duty Act Cap 411 LFN, 1990 (Cap S8 LFN 2004);

(b)Taxes and Levies (Approved List for Collection) Act 1998 No.2, 1998;

(c)All regulations, proclamations, government notices or rules issued in terms of these legislations;

(d)Any other law for the assessment, collection and accounting of revenue accruable to the Government of the Federation as may be made by the National Assembly from time to time or regulation incidental to these laws, conferring any power, duty and obligation on the service;

(e)Enactment or laws imposing Taxes and Levies within the Federal Capital Territory; and

(f)Enactment of Laws imposing collection of taxes, fees and levies collected by other Government agencies and companies including signature bonus, pipeline fees, penalty for gas flared, depot levies and licenses, fees for Oil Exploration Licence (OEL), Oil Mining Licence (OML), Oil Production Licence (OPL), royalties, rents (productive and non-productive), fees for licences to operate drilling rigs, fees for oil pipeline licences, haulage fees and all such fees prevalent in the oil industry but not limited to the above listed.

  1. TAT replaced the former Body of Appeal Commissioners and the Value Added Tax tribunals established by the previous Laws.
  1. The said Body of Commissioners and Value Added Tax Tribunals (VAT-T) were established by the Personal Income Tax Act, Companies Income Tax Act, Petroleum Profit Tax Act and Value Added Tax Act to entertain and resolve disputes arising from companies income tax, petroleum profit tax, capital gains tax, personal income tax and value added tax matters.
  2. The Body of Appeal Commissioners was a tax tribunal of first instance. Most states however did not establish this tribunalwhich grossly deprived most tax payers of the right to a speedy appeal expected under the BAC structure.
  3. The introduction of Tax Appeal Tribunal is therefore intended to effectively address this challenge, as no tax payer should be shut out of the tax appeal structure due to failure of relevant authorities to constitute such a vital adjudicatory body.
  4. According to the World Bank’s report on “Doing Business 2011”[14], Nigeria ranks 137 out of 183 countries surveyed on ‘the ease of doing business index and 134 on the ease of paying taxes’.The report showed clearly that Nigeria has been slipping back consistently on the ease of paying taxes index which is a function of three main indicators namely:

(a)number of tax payments;

(b)time required to comply with tax obligation; and

(c)total tax rate.[15]

  1. The consequence of the above report shows that there are more to be done and this can be achieved when the Federal Inland Revenue Service (Establishment) Act 2007 is further reformed in order to strengthen the Service.
  2. Although the FIRS Act, 2007 has made some remarkable improvements to the tax system in the recent past by instituting modern day reforms which has resulted in remarkable improvements in the FIRS’ operational activities, there is still the need to review the Act to enable the service effectively carry out its responsibilities. If taxes are to be collected effectively and fairly both in monetary and equitable terms for the benefit of all Nigerians, our proposed or intending reforms should be key and must warrant serious consideration, as there seems to be obvious short comings or lacuna noticed in the operation of the entire Act. The short comings are but not limited to the following issues:
  1. The enormous power of the Minister of Finance under paragraph 2 (1) of the 5th Schedule to the Act to solely appoint all the Tax AppealCommissionerswithout any input or checks and balances from any other arms of government.
  2. Restriction on the right of appeal against decisions of the Tribunal under paragraph 17 (1) (2) (3) and (4) of the 5th Schedule to the Act. This paragraph restricts the right of appealto grounds on point(s) of lawfrom the decision of the Tribunal to the Federal High Court. The Act is also silent on the right to further appeal to the Supreme Court against the decision of the Court of Appeal.
  3. Apparent conflict in the exercise of the Tribunal’s discretion to enlarge time within which to challenge an assessment and when it becomes final after service of demand notices. This can be deduced under paragraph 13 of the 5th Schedule to the Act.
  4. The vestingof jurisdiction on TAT, by the Act under paragraph 11 (1) of the 5th Schedule to settle all disputes arising from the operation of the Act and all the tax statutes administered by FIRS, despite the exclusive jurisdiction conferred on the Federal High Court on the same matters by the Constitution.
  5. Apparent conflict on the power to make rules of practice and procedure of the TAT. The Act vests the power on the Tribunal and the Minister of Finance as well, under paragraphs 20 (1) and 21 of the 5th Schedule.
  6. The provision of section 23 on Tax refunds is grossly inadequate. There should be appropriate funds allocated or retained to cater for tax refunds both at Federal and State levels. Fairness and equity requires that cash refunds should be made promptly to deserving tax payers.
  7. Online filing and tax payment which has been introduced as a matter of policy[16] should be strengthened through a regulation, to reduce the compliance time and the associated cost. The policy should be well publicised so that the tax payers will be aware and take advantage of it. This will go a long way to reduce human interaction between the tax payers and the tax officials which could also help in checking sharp practices and increase tax payment.
  1. It is in consideration of these challenges and other issues that the Nigerian Law Reform Commission in pursuance of its mandate under section 5 of its enabling Act[17] and in line with the economic reforms of the government decided to embark on this reform exercise with a view to making proposals to reform the FIRS Act in order to enable the Service to effectively carry out its responsibilities and strengthen the revenue base of the Nigerian economy.

OBJECTIVES OF THE REFORM

i.To simplify and improve the provisions of the Act in order to enhance revenue generation.

ii.To stimulate the economy and enable Nigeria to assume a more competitive position on the global stage.

iii.To reduce the incidence of tax avoidance or tax evasion in Nigeria by having an effective database to keep records and monitor payment of taxes by all potential tax payers.

iv.To simplify some of the provisions of the Act and present them in non-technical language that can be understood by the average Nigerian.

v.To improve the effectiveness and efficiency of the Tax Appeal Tribunal.

vi.To improve efficiency of tax collection and payment.

vii. To ensure correct tax assessment by tax authorities in order to generate confidence in the citizens for efficient payment of tax.

PART B

OVERVIEW OF THE FEDERAL INLAND REVENUE SERVICE (ESTABLISHMENT) ACT 2007

OVERVIEW OF THE ACT

29. The Federal Inland Revenue Service (Establishment) Act, 2007 consists of eight (8) parts, seventy (70) sections and five (5) schedules. Part one of the Act deals with establishment of the Federal Inland Revenue Service and its Management Board, etc., part two deals with the powers and functions of the Board and the Service, part three deals with management and staff of the Service, part four covers the financial provisions, part five deals with tax administration and enforcement, part six of the Act covers offences and penalties, part seven covers the general provisions and part 8 deals with miscellaneous provisions including the schedules.

ESTABLISHMENT OF THE FEDERAL INLAND REVENUE SERVICE: SECTION 1

30. Section 1 of the Act provides for the establishment of the Federal Inland Revenue Service (FIRS) and vests it with corporate personality with the power to sue and be sued in its corporate name.

OBJECTS OF THE SERVICE: SECTION 2

31. Section 2 deals with the objects of the Service which shall be to control and administer the different taxes and laws in the first schedule or other laws made or to be made from time to time by the National Assembly.

ESTABLISHMENT AND COMPOSITION OF THE MANAGEMENT BOARD: SECTION 3

32. Section 3 of the Act provides for the Establishment and composition of the management Board which shall have overall supervision of the Service as specified under the Act.

TENURE OF OFFICE:SECTION 4

33. Section 4 of the Act provides for tenure of office of the Chairman and other members of the Board.

CESSATION OF MEMBERSHIP: SECTION 5

34. Section 5 deals with cessation of members of the Board on different grounds which include resignation, unsound mind, bankruptcy, conviction of a felony or any offence involving dishonesty or corruption, incapacity to carry on the functions of office etc.

EMOLUMENTS, ETC. OF MEMBERS: SECTION 6

35. Section 6 of the Act provides for emoluments, allowances and benefits of the Chairman and members of the Board.

POWERS OF THE BOARD: SECTION 7

36. Section 7 of the Act empowers the Board to manage and superintend the general policies, review and approves strategic plans, stipulate remuneration, allowances, benefits and pensions of staff and to do other things which in its opinion are necessary to ensure the efficient/performance of the functions of the Service under this Act.

FUNCTIONS OF THE SERVICE:SECTION 8

37. Section 8 provides the Functions of the Service.

ESTABLISHMENT OF TECHNICAL COMMITTEE OF THE BOARD: SECTION 9

38. Section 9 provides for the establishment and members of the Technical Committee of the Board and empowers it to co-opt from the service any staff that can assist it in carrying out its functions.

FUNCTIONS OF THE TECHNICAL COMMITTEE: SECTION 10

39. Section 10 provides for the functions of the technical Committee of the Board which is to consider all tax matters that require professional and technical expertise and make recommendations to the Board.

EXECUTIVE CHAIRMAN OF THE SERVICE: SECTION 11

40. Section 11 of the Act provides for the appointment of the Executive Chairman of the Board by the President subject to the confirmation of the Senate. Such executive chairman is the chief executive and responsible for the day to day running of the Service.

APPOINTMENT OF SECRETARY TO THE BOARD AND OTHER STAFF OF THE SERVICE: SECTION 12

41. Section 12 of the Act provides for the appointmentof the Secretary of the Board and such appointment shall be made from within the Service. It further provide for the functions of the secretary and appointment of other staff of the Service by the Board.

PENSIONS: SECTION 13

42. Section 13 deals with the pension and other retirement benefits of staff of the Board which shall be as provided under the Pension Reform Act.

STAFF REGULATIONS: SECTION 14

43. Section14 empowers the Board to make regulations generally relating to the condition of services of service of the staff such issues as appointment, promotion, termination, dismissal and discipline of staff or employees of the Service among other issues.

FUNDS OF THE SERVICE: SECTION 15

44. Section 15provides for the Service to establish and maintain a Fund.

It further stipulates the sources of the fund.

EXPENDITURE OF THE SERVICE: SECTION 16

45. Section 16 of the Act mandates the Service to pay all of their liabilities from the Fund of the Service.

ESTIMATES: SECTION 17

46. Section 17 of the Act mandates the Service to prepare the estimates of its income and expenditure for the next year for the purpose of appropriation by the National Assembly.

ACCOUNTS AND AUDIT: SECTION 18

47. Section 18 of the Act provides for keeping of proper account and record by the Service and such account and record to be audited accordingly.